Allison Tait, A Real Life Credit Card Stressbuster:

Allison Tait is the writer of a great book called, Credit Card Stressbusters. This book is an in depth look at why people use and love their credit cards. Plus the book deals with how to lose your credit card and how to pay off the debt. We are lucky to have a great interview with her this month.

OK Allison, maybe you could tell us a bit about your background and what you are doing now?
I’m a journalist with more than 20 years’ experience. For the past eight years, I’ve specialised in writing about personal finance for ninemsn Money and MSN NZ and, more recently, Madison and news.com.au. I’m very good at asking questions!

Allison you have written a book called Credit Card Stressbusters. In there you talk about all the reasons why people should cut up their card. But if you had to narrow it down to just the top three reasons why people shouldn't get a credit card, what would they be?
In the book, I suggest that people cut up their cards because the implication is that if you’re reading the book, you’ve got a problem with credit card debt. I think the three biggest problems with credit cards are these:

1. They create distance between the purchase and the payment – and make it much easier to spend money and live beyond our means.
2. People seem to forget that the money they’re spending is not theirs – it belongs to the credit card provider and it comes at a hefty price (high interest rates).
3. The minimum payments on credit card debt are devised to keep the bank happy – they’re not designed to pay off your debt. If you only pay the minimum payment, it can take years and years to clear the debt, and cost you thousands of dollars. To use a credit card wisely, you must pay it off in full each month.

How did you come up with this idea and why did you want to write this book?
I was approached to write the book as part of a series (there’s a great book called Mortgage Stressbusters as well). At the time that I wrote it, Australians were carrying record amounts of credit card and personal debt. I wanted to write a book that was easy to read, practical and, possibly, entertaining. I really wanted readers to get to the end of the book (which is no mean feat with finance sometimes).

In the book you ask a question from the readers’ point of view "How do I live without a credit card when the world is set up that way?" What do you mean by the world is set up that way and how does somebody live without the convenience of a credit card?
The world is moving away from cash and towards cards. Some analysts go so far as to suggest that we might be without cash completely in 30 to 50 years. You need a credit card to make a booking just about anywhere these days (particularly online) and marketing pushes us towards the idea that convenience is the key (you only need to see that latest ‘Tap and Go’ ads, where a man trying to pay with cash is treated like a social pariah).

It’s hard to manage without a credit card.

But there is a solution, and that’s a Visa or MasterCard debit card. Same convenience and access, but you’re using your own cash, so less chance you’ll get yourself into personal debt trouble.

In your book you use real stories from real people struggling with credit card debt. Is there a story which sticks out in your mind about someone who was in debt that you would like to share? (A Special Case)
One that stands out for me was the woman who fell to the curse of ‘creeping limit’. She was receiving ‘pre-approved limit increase’ letters from her financial institution, arriving at those times when she might need extra cash (Christmas, summer holidays etc). Her provider also allowed her to go over her limit, rather than having her card declined. The limit on her credit card crept up over time from $1000 to $4500, almost without her realising – all while she was still trying to pay off an overseas credit card with a limit of $7500.

She was working hard to pay off both debts – all the while consoling herself with the fact that her credit card debt wasn’t the worst in her circle of friends. One of her mates had a credit card debt of $30,000.

It just goes to show you that you need to look at your own financial situation long and hard before accepting that the bank has your best interests at heart when it offers an increase. Many people think ‘well, they wouldn’t offer it if they didn’t think I could afford it’, but it requires more research than that.

What are the biggest excuses you hear from people in debt who won’t give up their credit cards?
They say that they keep them for the ‘rewards’ – but those air miles are coming at a very high price if you can’t afford them. They say that they need a card for ‘emergencies’ – but, unfortunately, emergencies seem to crop up time and time again.

What do you think of the marketing of Credit Cards?
I think that, like all marketing, it’s designed to promote credit cards; to sell a dream. It’s up to each of us to take control of our own finances and decide if the dream is worth it.

Have you always been good with money and budgeting, was it something natural or did you have to learn. And if you were no good at a point what made you change?
I think we all have to learn to a degree. My parents were always very sensible about money and taught us all the importance of saving. When it came to credit cards, I got my first one at 23, when I went overseas for a couple of years. It had a low limit and I didn’t use it that much. My worst credit card years were in my late 20s, when I was single, working in magazines and having a splendid old time! But it didn’t take me long to work out that it wasn’t sustainable – and the extra hard work it required to earn extra money to pay off my debt was a good, hard lesson. I never went too mad though. I have a healthy respect for money.

If someone is really drowning in debt, what would be your first bit of advice?
Get some help. There are many great, free financial counselling services available and they will be able to help you to really work through the figures and look at your options. To get on top of your debt, you need a clear picture of that debt – as ugly as it might be. Oh, and cut up the credit card! You can’t pay it off if you’re still using it.

If you could go back in time to your 21st birthday and give yourself advice about money what would you say?
I don’t think I’d change too much. I’d probably be a lot wealthier now if I’d put the money that I spent travelling overseas for two years into a house deposit, but I’d be a lot poorer on the experience side of the equation. I think the key is to live within your means. If you’re not spending what you don’t have it’s much easier to get ahead.

If you had to recommend a book on budgeting for people to read where would you point them?
To be honest, I’d probably point them to the internet. There are some fabulous websites designed to get people started on budgeting, and online tools and calculators to help. Start at http://www.moneysmart.gov.au/

Have you got any budgeting tips for our readers that are not credit card related?
The best tool for budgeting is honesty. You have to be honest with yourself about what you spend. You need to get out 12 months worth of bills and actually work out what the monthly electricity, water and gas payments are. When it comes to daily spending, get a notebook and write down every single thing you spend for two weeks. It will give you the answer to that eternal question: “Where does my money go?”

When the GFC hit the world did you notice people’s habits changing, and if yes, what were they and have they stayed changed, or do you think they have gone back pre GFC?
News.com.au reported last week that Australians owe $49.3bn on credit cards – an average of $3321 per credit cardholder. That’s higher than the $3200 it was when I wrote my book in 2009. Experts are suggesting that part of this is down to climbing living costs – we’re putting more everyday expenses on our credit cards. It’s important that we remember that credit cards are one of the most expensive ways to borrow money.

You talk about compound interest in the book. But why is this so important?
For most of us, the compound interest formula was something we learned in high school maths and promptly forgot. But it’s important. With compound interest, the amount you owe on your credit card is calculated on both the principal amount owed (say $1000) and the interest ($150, assuming an interest rate of 15 percent). Unless you pay your credit card off in full each month, you are charged interest upon interest upon interest. And it’s calculated monthly. It’s called the compounding effect and means that the amount you owe will just keep growing. In two years’ time, assuming the above figures, you’ll owe $1347.35 on that card – which means that your debt has grown by more than one third!

Is there anything extra you didn’t get to include in the book that you wished you had?
No, I was pretty happy. I think I went a long way towards covering the subject of paying off your credit cards!

Thanks a lot Allison, you have been most helpful.